So why is Frost's latest medical venture—
Opko HealthOPK -0.06105006105006105%Opko Health Inc.U.S.: NYSEUSD16.37
-0.01-0.06105006105006105%
/Date(1438376686160-0500)/
Volume (Delayed 15m)
:
2641818AFTER HOURSUSD16.35
-0.02-0.12217470983506414%
Volume (Delayed 15m)
:
32418
P/E Ratio
N/AMarket Cap
7584073815.01776
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(OPK)—one of the most heavily shorted companies on the New York Stock Exchange? Investors have sold short about 25% of the Miami company's free-trading shares, piling up a short interest that now represents 42 days' worth of trading volume. Likely reasons for that skepticism aren't hard to find. Opko has lost money for the five years since Frost merged a moribund public shell company with a couple of development-stage ophthalmology programs. The ophthalmic products didn't pan out. Opko later shifted emphasis to blood tests for cancer and Alzheimer's disease. Frequent corporate acquisitions for stock, and a little cash, have added a variety of Latin American pharmaceuticals, medical devices, and experimental drugs for treating asthma, Lou Gehrig's disease and chemotherapy-induced nausea. Opko looks more like a venture-capital portfolio than a business.

With its stock trading at a recent $4.18, the company's 300 million outstanding shares mean that Opko is valued at $1.25 billion. That's a generous market capitalization for a business with 12 cents a share in tangible book value, while both revenues and losses run along at about $40 million a year. Frost's impressive track record is surely worth something, but it's not possible through fundamental research to say that Opko is worth more than a billion dollars…or twice that, if you heed the two brokerage analysts who cover the stock, one of whom hails from Ladenburg. The bulls base the bulk of their valuation on revenues they expect from Opko's planned blood tests for Alzheimer's and certain cancers. But Opko admitted in its summer presentations to investors that the Alzheimer's test isn't performing as well as expected as it undergoes validation trials. That would come as no surprise to some outside scientists. When Opko's research collaborators published their first intriguing scientific papers on the Alzheimer's blood test, and a separate test for prostate cancer, the reports elicited strikingly critical comments in the medical journals. Without the success of Opko's diagnostic tests, there's little in the bulls' financial models to support a stock price of more than a buck or two.

Yet its billion-dollar valuation means that Opko has fans. The company's biggest is Frost, who owns 39% of the stock and who adds to those holdings by purchasing substantial amounts of stock almost every day in the open market, a vote of confidence that he's signaled with a remarkable two-year series of insider buying notices. "Other people are investing in the company and I want to align myself with them," said Frost in a phone interview last Thursday with Barron's. "Besides which, I think it's a good investment." Frost said that he's often encountered short sellers when building his businesses. Opko's mix of assets may look complicated, he acknowledged. "But I've never been connected with a company that has so many valuable assets as Opko," Frost said.

WHETHER OR NOT FROST'S ambitions for Opko pan out, he's a hazardous guy to bet against–and not just because the company's crowded short interest invites a squeeze. Frost was a Miami Beach dermatologist in 1972 when he joined a friend in salvaging a drug company called Key Pharmaceuticals. In 1986 they sold Key to Schering-Plough for $800 million. The next year Frost started IVAX, building the drug company into one of the notable success stories on the American Stock Exchange. When Teva bought the company in 2006, Frost received about $500 million in cash and $600 million worth of Teva shares.

Both Feinberg and LeBow joined in as investors in 2007, when Frost formed Opko as a public vehicle for a couple of companies developing treatments for the age-related blindness known as macular degeneration. As he'd often done before, Frost took a thrifty route to the public markets by reverse-merging the drug companies into a public shell company. Unfortunately, Opko's lead drug against macular degeneration didn't meet its clinical trial's goal of reducing vision loss. A line of retina-imaging instruments also failed to thrive, and Opko sold off the instrumentation products last year. By that time, however, Frost told investors about Opko's blood tests that could detect Alzheimer's long before symptoms appeared.

The tests were based on technology developed by Thomas Kodadek, a professor at the Scripps Research Institute branch in Jupiter, Fla., who in 2011 reported in the journal Cell that he and his colleagues had discovered antibodies in patient blood samples that enabled them to distinguish Alzheimer's victims from others. This "broadly applicable (universal?) technology," said a 2011 Opko investor presentation, could allow the discovery of "biomarkers" that could detect many diseases with a simple blood test.

A stock analyst at Ladenburg projected as much as $3 billion in annual sales for an Alzheimer's blood test and told investors to expect validation of Kodadek's biomarker technology by mid-2012. But when the Scripps professor appeared at a July 2012 Alzheimer's conference in Vancouver, British Columbia, he reported that the latest version of the blood test detected about 70% of Alzheimer's cases—instead of the 94% he'd reported in his earlier paper.

"We're working to get the sensitivity back up in various ways," Frost told Barron's. "I'm very optimistic that we'll have a valuable test."

The Opko biomarkers' mediocre performance was anticipated in an August 2011 article in the journal Clinical Chemistry, in which a pair of University of Washington statisticians explained how the inconclusive design of Kodadek's initial study made it vulnerable to false-positive findings. Many initially promising biomarker discoveries have failed to hold up in rigorous validation studies, the statisticians wrote.

The Bottom Line

Opko shares are worth $1 or $2 at best unless its new diagnostic tests are successful. Validation studies haven't been as positive as early claims. The shares trade at $4.18.

Opko's other leading diagnostics program is a prostate-cancer test that screens for three additional biomarkers along with the standard prostate-specific antigen. Frost said the test was Opko's nearest hope for large revenue and profits. A May 2010 Journal of Clinical Oncology report by the test's developers claimed that their four-marker test would reduce unnecessary biopsies by half. However, an accompanying editorial in the same issue pointed out that the new screen was less sensitive than existing tests—failing to detect 14% of high-grade cancers—and was not likely to change prostate-cancer mortality.

With Frost's deep pockets and a dizzyingly diverse project portfolio, Opko will surely have other stories to tell if these diagnostics don't fly. But prospective investors might want to wait for the validation that comes with real fundamentals.